- • May 20, 2020
Some Things to Know About Durable Powers of Attorney
The odds are that if you have an estate plan, it includes a durable power of attorney. Its purpose is to allow someone else to act for you. While you expect a durable power to be used only when you are unable to handle your affairs, most durable powers are drafted so the powers conferred on the “attorney-in-fact” (the person you appoint under the durable power) are effective at all times.
Because an attorney-in-fact is an agent (as well as a fiduciary), it is a consensual relationship. An agent’s power begins when they learn of their agency and agree in writing or by their actions to serve as agent. The powers granted to an attorney-in-fact are often quite broad, commonly granting complete access to bank, brokerage, and digital accounts and the power to buy and sell assets, manage real estate, pay bills, file tax returns and pay taxes, make elections regarding retirement plan accounts, enter into and perform under contracts, and disclaim gifts. Some durable powers also empower your attorney-in-fact to make gifts of your assets to themselves or others. The law requires third parties to honor a durable power. Thus, common sense tells us that we should grant a durable power only to someone we trust absolutely and in whose judgement we have great confidence.
While you may conclude that it is in your best interest to inform a non-spouse attorney-in-fact as soon as you execute the durable power appointing them, you may choose to inform them only when you need them to act. With their expansive powers, durable powers are unfortunately subject to abuse. That abuse is not as rare as we might hope and there probably is no harm in reducing the possibility for abuse by delaying the effectiveness of a durable power. You need to decide if it is important under your circumstances to let your named attorney-in-fact know sooner rather than later about their appointment. Once their appointment is effective, make sure they understand their responsibilities.
Many people execute two or more durable powers, one as primary and one or more as alternates. To avoid problems with enforceability, alternate durable powers usually do not indicate that they are alternate. Instead, when multiple powers are signed, individuals often instruct their attorney not to release the alternate durable power to the alternate attorney-in-fact unless the primary attorney-in-fact can’t act. This reduces the possibility of conflicting instructions to third parties because an alternate would have the written durable power in their possession for presentment only if a third party determined that the circumstances warranted it. Some forms of durable power provide for an alternate, but that creates the risk of conflicting instructions or a dispute over whether the circumstances are such that the alternate has the power to act. Attempts to articulate criteria in the durable power for whether the alternate has succeeded to the power can create their own hurdles and problems, especially if the alternate must act promptly.
While an attorney-in-fact is not a guardian and does not expect to have the affirmative responsibilities associated with serving as one, there is a circumstance under which the law imposes an affirmative obligation on an attorney-in-fact to act to protect your rights. A recent First Circuit case illustrates the point. In Stauffer v. Internal Revenue Service, 939 F. 3d 1 (1st Cir. 2019), the court dealt with the right of a financially disabled taxpayer (one who is unable to manage their financial affairs by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months) to apply for a large refund after the normal statute of limitations for filing had passed. Ordinarily, the period for applying for the refund would have been extended by the period of the taxpayer’s financial disability. However, the taxpayer had granted a durable power to his son, who had accepted (actually requested) the durable power to help his father. The First Circuit affirmed the District Court, ruling that the durable power, which the District Court found that the son had not renounced, qualified the son as a person authorized to act on behalf of his father in financial matters for the purposes of I.R.C. 6511(h)(2)(B) (which says that “an individual shall not be treated as financially disabled during any period that … any other person is authorized to act on behalf of such individual in financial matters”). Therefore, because the father was able to act through his attorney-in-fact, he was not entitled to the extension of the period to file. Once your durable power is in effect, you may lose rights to credits or refunds unless your attorney-in-fact timely applies for them without benefit of any extension of time to file on account of your condition. Your attorney-in-fact could be liable for failing to timely apply.